case study on rmf
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CASE ON MUTUAL FUNDS WITH EMPHASIS ON RELIANCE MUTUAL FUND
1 OBJECTIVE OF THE STUDY
• To give a brief idea about the Mutual Funds and its benefits available from Mutual Fund
investment.
• To give an idea of the types of schemes available.
• To discuss about the market trends of Mutual Fund investment.
• To study some of the Reliance mutual fund schemes and analyze them.
2 MUTUAL FUND INDUSTRY IN INDIA
2.1 The Evolution
The concept of mutual funds in India dates back to the year 1963. The era between 1963
and 1987 marked the existence of only one mutual fund company in India with Rs. 67bn assets
under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the
end of the 80s decade, few other mutual fund companies in India took their position in mutual
fund market.
The new entries of mutual fund companies in India were SBI Mutual Fund, Canra bank
Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India
Mutual Fund. The succeeding decade showed a new horizon in Indian mutual fund industry. By
the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds
started penetrating the fund families. In the same year the first Mutual Fund Regulations came
into existence with re-registering all mutual funds except UTI. The regulations were further
given a revised shape in 1996.Kothari Pioneer was the first private sector mutual fund company
in India which has now merged with Franklin Templeton. Just after ten years with private sector
player’s penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fundcompanies in India.
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2.2 MUTUAL FUND CONCEPT
Mutual fund is a trust that pools money from a group of investors (sharing common
financial goals) and invest the money thus collected into asset classes that match the stated
investment objectives of the scheme. Since the stated investment objectives of a mutual fund
scheme generally form the basis for an investor's decision to contribute money to the pool, a
mutual fund can not deviate from its stated objectives at any point of time.
Every Mutual Fund is managed by a fund manager, who using his investment
management skills and necessary research works ensures much better return than what an
investor can manage on his own. The capital appreciation and other incomes earned from these
investments are passed on to the investors (also known as unit holders) in proportion of the
number of units they own.
When an investor subscribes for the units of a mutual fund, he becomes part owner of the
assets of the fund in the same proportion as his contribution amount put up with the corpus (the
total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a
unit holder
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Any change in the value of the investments made into capital market instruments (such as
shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined
as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is
calculated by dividing the market value of scheme's assets by the total number of units issued to
the investors.
2.3 Structure of a Mutual Fund :
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2.4 NATURE OF MUTUAL FUND
A common pool of money into which investors place their contributions to be invested in
accordance with a stated objective. The ownership of the fund is joint or mutual & the fund
belongs to all investors in the proportionate to contribution made by them.
Mutual Fund Operation Flow Chart
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Most people have neither the time nor interest to research and select individual stocks and
bonds for their investment portfolios, and that's where mutual funds come in. Mutual funds are
composed of stocks, bonds and other assets, giving us diversification, which means a decline in
value in any one stock or bond won't significantly hurt our overall return. A handful of well-
chosen mutual funds or index funds can offer a diversified portfolio that allows the individual
investor to spend his or her time on other pursuits. Thousands of mutual funds are available that
can satisfy the objectives of different types of investors.
2.5 ADVANTAGES OF MUTUAL FUND
Sl.
No.
Advantage Particulars
1.Portfolio
Diversification
Mutual Funds invest in a well-diversified portfolio of securities which
enables investor to hold a diversified investment portfolio (whether the
amount of investment is big or small).
2.Professional
Management
Fund manager undergoes through various research works and has better
investment management skills which ensure higher returns to the
investor than what he can manage on his own.
3. Less Risk
Investors acquire a diversified portfolio of securities even with a small
investment in a Mutual Fund. The risk in a diversified portfolio is lesser
than investing in merely 2 or 3 securities.
4.Low Transaction
Costs
Due to the economies of scale (benefits of larger volumes), mutual
funds pay lesser transaction costs. These benefits are passed on to the
investors.
5. LiquidityAn investor may not be able to sell some of the shares held by him very
easily and quickly, whereas units of a mutual fund are far more liquid.
6.Choice of
Schemes
Mutual funds provide investors with various schemes with different
investment objectives. Investors have the option of investing in a
scheme having a correlation between its investment objectives and their
own financial goals. These schemes further have different plans/options
7. Transparency
Funds provide investors with updated information pertaining to the
markets and the schemes. All material facts are disclosed to investors as
required by the regulator.
8. Flexibility Investors also benefit from the convenience and flexibility offered by
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Mutual Funds. Investors can switch their holdings from a debt scheme
to an equity scheme and vice-versa. Option of systematic (at regular
intervals) investment and withdrawal is also offered to the investors in
most open-end schemes.
9. Safety
Mutual Fund industry is part of a well-regulated investmentenvironment where the interests of the investors are protected by the
regulator. All funds are registered with SEBI and complete transparency
is forced.
2.6 DISADVANTAGES OF MUTUAL FUND
Sl.
No.Disadvantage Particulars
1.
Costs Control
Not in the Hands
of an Investor
Investor has to pay investment management fees and fund distribution
costs as a percentage of the value of his investments (as long as he holds
the units), irrespective of the performance of the fund.
2.No Customized
Portfolios
The portfolio of securities in which a fund invests is a decision taken by
the fund manager. Investors have no right to interfere in the decision
making process of a fund manager, which some investors find as a
constraint in achieving their financial objectives.
3.
Difficulty in
Selecting a
Suitable Fund
Scheme
Many investors find it difficult to select one option from the plethora of
funds/schemes/plans available. For this, they may have to take advice
from financial planners in order to invest in the right fund to achieve
their objectives.
3 VARIOUS INVESTMENT OPTIONS IN MUTUAL FUNDS:
To cater to different investment needs, Mutual Funds offer various investment options.
Some of the important investment options include:
i. Growth Option: Dividend is not paid-out under a Growth Option and the investor realizes
only the capital appreciation on the investment (by an increase in NAV).
ii. Dividend Payout Option: Dividends are paid-out to investors under the Dividend Payout
Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.
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iii. Dividend Re-investment Option: Here the dividend accrued on mutual funds is
automatically re-invested in purchasing additional units in open-ended funds. In most cases
mutual funds offer the investor an option of collecting dividends or re-investing the same.
iv. Retirement Pension Option: Some schemes are linked with retirement pension. Individuals
participate in these options for themselves, and corporate participate for their employees.
v. Insurance Option: Certain Mutual Funds offer schemes that provide insurance cover to
investors as an added benefit.
vi. Systematic Investment Plan (SIP):
What is an SIP:
To the first time investor, a successful wealth manager would recommend an SIP as the most
popular and prudent way to invest in a Fund .So let us see what a Systematic Investment Plan
mean.
Key Points
Under an SIP, the money is invested by the customer in committed installments over a certain
period. For Example, Rs.5,000 every month over the next six months.The customer typically
authorizes a monthly Auto Debit Facility to the account or may provide post-dated cheques for
the monthly investment.
Auto Debit Facility: It is a facility that debits your bank a/c automatically and the amounts get
credited to your Mutual Fund a/c every month.
As an investment Advisor, it is important to understand that it is quite impossible to ‘time ‘ the
market. Given the Volatility and vagaries of the financial markets especially the stockmarkets,it
is much more prudent to invest in small amounts over a period of time .
Advantage of SIP:
• SIP helps one to cover both the ‘ups’ and the ‘downs’ across a period .Thus the average
unit price comes down.
• Investor covers the rise and fall in the markets over the period of time.
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• The customer has no Lock-in period in an SIP and can continue to buy or sell into the
fund.
vii. Systematic Withdrawal Plan (SWP): As opposed to the Systematic Investment Plan, the
Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined
amount / units from his fund at a pre-determined interval. The investor's units will be redeemed
at the applicable NAV as on that day.
4 RISK FACTORS OF MUTUAL FUNDS
i. The Risk-Return Trade-off: The most important relationship to understand is the risk-return
trade-off. Higher the risk greater the returns/loss and lower the risk lesser the returns/loss.
Hence it is upto you, the investor to decide how much risk you are willing to take. In order to do
this you must first be aware of the different types of risks involved with your investment
decision.
ii. Market Risk: Sometimes prices and yields of all securities rise and fall. Broad outside
influences affecting the market in general lead to this. This is true, may it be big corporations or
smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan
(“SIP”) that works on the concept of Rupee Cost Averaging (“RCA”) might help mitigate this
risk.
iii. Credit Risk: The debt servicing ability (may it be interest payments or repayment of
principal) of a company through its cash flows determines the Credit Risk faced by you. This
credit risk is measured by independent rating agencies like CRISIL who rate companies and their
paper. A ‘AAA’ rating is considered the safest whereas a ‘D’ rating is considered poor credit
quality. A well-diversified portfolio might help mitigate this risk.
iv. Inflation Risk: Things you hear people talk about:"Rs. 100 today is worth more than Rs. 100
tomorrow."The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of
times people make conservative investment decisions to protect their capital but end up with a
sum of money that can buy less than what the principal could at the time of the investment. This
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happens when inflation grows faster than the return on your investment. A well-diversified
portfolio with some investment in equities might help mitigate this risk.
v. Interest Rate Risk: In a free market economy interest rates are difficult if not impossible to
predict. Changes in interest rates affect the prices of bonds as well as equities. If interest rates
rise the prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising
interest rate environment. A well-diversified portfolio might help mitigate this risk.
vi. Political/Government Policy Risk: Changes in government policy and political decision can
change the investment environment. They can create a favorable environment for investment or
vice versa.
vii. Liquidity Risk: Liquidity risk arises when it becomes difficult to sell the securities that one
has purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities
as well as internal risk controls that lean towards purchase of liquid securities.
Risk Hierarchy of Different Mutual Funds
Thus, different mutual fund schemes are exposed to different levels of risk and investors
should know the level of risks associated with these schemes before investing. The graphical
representation hereunder provides a clearer picture of the relationship between mutual funds and
levels of risk associated with these funds:
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5 TYPES OF MUTUAL FUNDS:
5.1 General Classification of Mutual Funds
Open-end Funds
Funds that can sell and purchase units at any point in time are classified as Open-end
Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of
continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end
fund is not required to keep selling new units to the investors at all times but is required to
always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is
calculated every day.
Closed-end Funds
Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period
are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all
times. After the closure of the offer, buying and redemption of units by the investors directly
from the Funds is not allowed. However, to protect the interests of the investors, SEBI provides
investors with two avenues to liquidate their positions:
1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell units
from/to each other. The trading is generally done at a discount to the NAV of the scheme.
The NAV of a closed-end fund is computed on a weekly basis (updated every Thursday).
2. Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the
corpus of the Fund and its outstanding units do get changed.
Load Funds
Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio
churning, fund manager's salary etc. Many funds recover these expenses from the investors in the
form of load. These funds are known as Load Funds. A load fund may impose following types of
loads on the investors:
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1. Entry Load - Also known as Front-end load, it refers to the load charged to an investor
at the time of his entry into a scheme. Entry load is deducted from the investor's
contribution amount to the fund.
2. Exit Load - Also known as Back-end load, these charges are imposed on an investor
when he redeems his units (exits from the scheme). Exit load is deducted from the
redemption proceeds to an outgoing investor.
3. Deferred Load - Deferred load is charged to the scheme over a period of time.
4. Contingent Deferred Sales Charge (CDSC) - In some schemes, the percentage of exit
load reduces as the investor stays longer with the fund. This type of load is known as
Contingent Deferred Sales Charge.
No-load Funds
All those funds that do not charge any of the above mentioned loads are known as No-
load Funds.
Tax-exempt Funds
Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-
end equity oriented funds are exempt from distribution tax (tax for distributing income to
investors). Long term capital gains and dividend income in the hands of investors are tax-free.
Non-Tax-exempt Funds
Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all
funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits
arising out of sale of units by an investor within 12 months of purchase are categorized as short-
term capital gains, which are taxable. Sale of units of an equity oriented fund is subject to
Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor.
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6 About The Company – Reliance Mutual Fund :
Reliance Mutual Fund(‘RMF’/Mutual Fund) is one of India’s leading Mutual Funds, with
Average Assets Under Management(AAUM) of Rs.90,661 Corers and an investor count of over
73.04 lakh folios .(AAUM and investor count as of July-Sep11)
Reliance Mutual Fund, a part of the Reliance Group, is one the fastest growing mutual
funds in India .RMF offers investors a well-rounded portfolio of products to meet varying
investor requirements and has presence in 179 cities across the country .Reliance Mutual Fund
constantly endeavors to launch innovative products and customer service initiatives to increase
value to investors .Reliance Capital Asset Management Limited (RCAM) is the asset manager of
Reliance Mutual Fund.RCAM a subsidiary of Reliance Mutual Fund.RCAM a subsidiary of
Reliance Capital Limited, which holds 92.93% of the paid-up capital of RCAM,the balance paid
up capital being held by minority shareholders.
Reliance Capital Ltd, is one of India’s leading and fastest growing private sector financial
services companies and ranks among the top 3 private sector financial services and banking
companies ,in terms of Networth.Reliance Capital Ltd has interests in asset management, life and
general insurance ,private equity and proprietary investments ,stock broking and other financial
services .
Reliance Mutual Fund (RMF) has been established as a trust under the Indian Trusts Act, 1882
with Reliance Capital Limited (RCL),as the Settler/Sponsor and Reliance Capital Trustee Co.
Limited (RCTCL),as the Trustee.
Reliance has been registered with the Securities & Exchange Board of India (SEBI) on June
30,1995.The name of Reliance capital Mutual Fund was changed to RMF and its effective from
11th March 2004 as per the SEBI guidelines.RMF was formed to launch various schemes under
which units are issued to the Public with a view to contribute to the capital market and to provideinvestors the opportunities to make investments in diversified securities..
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6.1 Sponsor : Reliance Capital Limited
Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited, a
subsidiary of Reliance Capital Limited, which holds 92.93% of the paid-up capital of Reliance
Capital Asset Management Limited, the balance paid up capital being held by minority
shareholders. Reliance Mutual Fund (RMF) has been sponsored by Reliance Capital Ltd
(RCL).The promoter of RCL is AAA Enterprises Private Limited. Reliance Capital Limited in a
Non Banking Finance Company and is one of the India’s Leading and fastest growing financial
service companies and ranks among the top three private sector financial services and banking
companies in India, in terms of Net worth. Net worth of RCL is as follows
Particulars(Rs in Crores) 2009-10 2008-09 2007-08
Net worth 6885.70 6687.30 5927.50
Total Income 2366.62 2974.85 2079.79
Profit After Tax 339.42 968.02 1025.45
Trustee : Reliance Capital Trustee Co. Limited.
6.2 Investment Manager/AMC: Reliance Capital Asset Management Limited
RCAM is an unlisted Public Limited Company incorporated under the companies Act,1956 on
February 24 ,1995,having its registered office at Mumbai. RCAM has been appointed as the
Asset Management company of RMF by the trustee of RMF vide Investment management
Agreement(IMA) dated May 12,1995 and executed between reliance Capital Trustee Co.
Limited and RCAM limited and amended on August 12,1997 amended on August
12,1997,January 20,2004 and February 2011 in line with SEBI (Mutual Funds)
Regulations,1996.
Statutory Details : The Sponsor, the trustee and the Investment Manager are
Incorporated under the companies Act 1956.
6.3 Vision and Mission Statement of RCAM:
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Vision Statement
To be a globally respected wealth creator with an emphasis on customer care and a culture of
good corporate governance.
Mission Statement
To create and nurture a world-class, high performance environment aimed at delighting our
customers.
6.4 Reliance Mutual Fund Schemes and Tax Rates:
Now , In this section we will see in detail about the Abridged Analysis of Open Ended Debt
Schemes and Analysis of Equity Funds .Later on we will go through the details of Taxation of
the Dividend and Capital Gain given to the investors in Reliance Mutual Fund.
6.4.1 Abridged Analysis of Open Ended Debt Scheme as on 31.10.2011
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Name of the
Scheme/Parameter
RLF RLF:
CP
RLF:
TP
RMM
Fund
RMT
Fund
RFRF-
ST
Plan
RRSF-
Debt
RST
Fund
RDB
Fund
RGS
Fund
RI
Fund
RM
Plan
Quarterly AAUM
As on 30.09.2011
Rs.Crs)
12,23
3
3,91
7
2,77
4
9,458 2,53
9
1,219 1,031 747 46 70 108 6,46
Weighted
Average Maturity
in days)
43 44 40 57 145 276 527 729 3,16
6
3,17
2
3.44
3
1,76
Modified
Duration(in days)
39 40 37 52 130 243 529 607 2,03
6
1,94
9
2,18
4
1,12
Mark to Market
%)
0 0 0 15 68 86 83 84 96 85 101 72
Weighted
AverageYTM (%)
9.13 9.14 9.16 9.33 9.40 9.57 10.40 9.28 9.21 8.73 9.42 9.49
Money Market
nstruments (%)
99.28 95.9
0
96.5
4
79.50 77.0
7
24.21 2.10 4.45 7.34 0.00 3.62 0.12
Floating Rate
nstruments (%)
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.83
Securitized Debt
PTC (%)
0.00 0.00 0.00 4.25 0.00 7.72 22.51 21.8
4
0.00 0.00 0.00 10.7
Corporate
Debt (%)
0.00 0.00 0.00 11.21 21.6
0
61.58 76.33 61.9
4
53.3
1
0.00 58.0
7
50.7
Cash & other
Receivables (%)
0.72 4.10 3.46 5.03 1.33 6.49 -0.94 4.48 2.35 14.9
5
-0.89 3.72
G secs (%) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.29 37.0
0
85.0
5
39.1
9
13.2
Equity (%) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 19.3
Total (%) 100 100 100 100 100 100 100 100 100 100 100 100
Money Market Instruments includes Commercial paper, Certificate of deposits & Treasury
Bills .Equity includes Index, stock futures & equity shares. Corporate Debt includes debenture.
*Weighted Average YTM for Debt portion of the portfolio.
Where,
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RLF – Reliance Liquidity Fund, RLF-CP - Reliance Liquidity Fund –Cash Plan.
RLF – TP – Reliance Liquidity Fund Treasury Plan, RMM Fund – Reliance Money Manager
Fund,RMT Fund – Reliance Medium Term Fund , RFRF-ST plan – Reliance Floating Rate Fund
–Short Term Plan ,RRSF- Debt – Reliance Regular Saving Fund – Debt,RST Fund – Reliance
Short Term Fund, RDB Fund – Reliance Dynamic Bond Fund ,RGF Securities – Reliance Gilt
Fund Securities, RI Fund – Reliance Income Fund,RMI Plan –Reliance Monthly Income Plan.
6.4.2 Abridged Analysis of Equity Funds August 2011 – October 2011
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6.4.3 Tax Rate:
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Conclusion:
From the above Details and the Analysis of Mutual Fund Industry in Detail We can noticethat Reliance Mutual Fund is one of the leading firm in the Mutual Fund Industry with Net worth
of around 9000 corers .Thus, our objectives are met under the above details and Discussions.